The Affordable Care Act's Risk Spreading Mechanisms

February 18, 2014

The Affordable Care Act (ACA) has a number of "risk mitigation" provisions, specifically reinsurance, risk corridors and risk adjustment. These provisions were put in place to encourage insurers to join the exchanges, as the ACA requires that insurers issue policies without regard to the health status of the applicant and charge the same premiums to applicants in the same age group, says Emily Egan, a senior health care policy analyst at the American Action Forum.

Insurers must price their policies based on their best guess as to who -- and how many people -- will enroll in the exchanges. The ACA's risk spreading mechanisms are meant to mitigate this uncertainty.

Reinsurance: The government will reimburse insurance companies for individuals that are "high risk" (a designation that will be based on the cost of medical claims, set at $45,000 for 2014). Once an individual reaches $45,000 in medical costs, the government will reimburse the insurance company for 80 percent of any claims above that amount.

Risk Corridors: Insurance companies must calculate target costs for each health plan issued. If costs are below 97 percent of the target, the insurer is assumed to have made a profit and that profit must be shared with the government. If costs are above 103 percent of the target, the insurer is assumed to have lost money, and the government will pay the insurance company to cover part of that loss.

Risk Adjustment: States will conduct a risk assessment of all the plans in their state. Assessments will also be made of the actuarial risk of the insurance pool within each health insurance plan. Those results will then be compared. Insurers who have risk scores above that of the state average will receive risk adjustment payments. Those who have risk scores below the average will have to pay into the program.

These provisions are projected by the Congressional Budget Office to be budget neutral, but we will know in 2015 whether that is actually the case. If more plans than were projected enroll high risk pools of individuals, payments to cover these losses will have to be made out of the general revenue, placing even more costs on taxpayers.